Based in El Dorado, Ark., Murphy (ticker: MUR) was until recently an integrated oil company. It operated refineries in places like Meraux, La., and Milford Haven, on the Celtic Sea in Wales; ran a profitable chain of U.S. and British gas stations and fuel kiosks outside Wal-Mart stores; and explored for and produced oil all over the world.

The company is considering the spinoff of its profitable gas-station business, as it focuses its attention on searching for and producing more oil and gas.
Travis Robertson for Barron's

President and Chief Executive David Wood, now in his third year at the helm, has been trying to unlock additional shareholder value. He wants to chuck most of the low-return refining businesses to focus on exploration and production, competing with bigger rivals like
Occidental Petroleumoxy 0.34731155132492925%Occidental Petroleum Corp.U.S.: NYSEUSD78.01
0.270.34731155132492925%
/Date(1425420219493-0600)/
Volume (Delayed 15m)
:
4263044AFTER HOURSUSD78.1922
0.1821999999999950.23355980002563773%
Volume (Delayed 15m)
:
9507
P/E Ratio
10.88005578800558Market Cap
59902554404.953
Dividend Yield
3.691834380207666% Rev. per Employee
1657350More quote details and news »oxyinYour ValueYour ChangeShort position
(OXY) and
Anadarko PetroleumAPC 0.9266032674957327%Anadarko Petroleum Corp.U.S.: NYSEUSD82.78
0.760.9266032674957327%
/Date(1425420034306-0600)/
Volume (Delayed 15m)
:
5432101AFTER HOURSUSD82.6
-0.180000000000007-0.2174438270113554%
Volume (Delayed 15m)
:
59953
P/E Ratio
N/AMarket Cap
41555430798.5993
Dividend Yield
1.3046629620681325% Rev. per Employee
2686070More quote details and news »APCinYour ValueYour ChangeShort position
(APC), and striving for the more attractive price/earnings ratios they fetch. Wood just sold two U.S. refineries for nearly $1 billion, and plans to unload some of the company's British refining and marketing operations next. He is also considering a spinoff of Murphy's 1,119 U.S. stations. The latter moves could be done via a tax-free spinoff, similar to what was done with the timber business years earlier. Murphy declined to make Wood available to speak with Barron's.

As encouraging as these shareholder-friendly moves are, they aren't reflected in the share price, which is down 28% on the year, even with the recent surge.

"It's one of the cheapest stocks out there," says Fadel Gheit, an analyst at Oppenheimer & Co. By his estimate, Murphy shares have as much as 40% upside within 18 months. At $53, the stock trades at a forward price-earnings multiple of 9.3 times, well below its 10-year median of 13.6. Its enterprise value/Ebitda multiple (market value plus net debt to earnings before interest, taxes, depreciation and amortization) is also low, at just under three times, compared with a 10-year median of 5.7. Murphy's price-to-book ratio is similarly depressed.

One reason is that Wood's promises about production haven't panned out as yet. His goal is to raise production of oil and gas to the equivalent of 300,000 barrels a day by 2015, from 190,000 currently, but for several straight quarters Murphy has missed its forecasts. In addition, the company has "announced a number of dry wells," explains Gheit, most recently in Brunei. Overall, more than half of the 13 wells slated to be drilled this year haven't proved economical.

Wall Street has responded by slashing earnings estimates. In the last three months, analysts have reduced their 2011 earnings forecasts to $5.88 a share, from $5.96, and for 2012 to $5.70 a share, from $7.38.

Bulls are inclined to attribute the problems more to bad luck, Murphy's law perhaps, than bad execution. "Lately, this company's drilling success has been well below its historical average, and like most baseball hitters in a slump, they should eventually come out of it," says Andrew Wallach, managing partner of Cumberland Associates, a New York money manager that owns the shares. "What this stock needs is just a little exploration success to have a strong upward move." The bulls also note that the 61-year-old family-run company has a solid balance sheet, with $1.8 billion cash and $1.3 billion in debt.

The Bottom Line

The shares trade at a big discount to their 10-year median forward price/earnings ratio, and have the potential to rise 40% within a year as the company's production grows.

Even though the progress has been bumpy, Wood has moved Murphy toward its goal. The company generated 79% of its profit from exploration and production in the third quarter.

And Murphy's third-quarter results, released Nov. 2, offered further encouragement. Aided by the asset sales and higher oil prices, quarterly profit came to $406 million, or $2.09 a share fully diluted, versus $202.8 million, or $1.05 a share, in the comparable quarter a year ago. On the accompanying conference call, Wood conceded that planning miscues and project interruptions had contributed to the drilling problems in Malaysia, as well as production snafus near the Shetland Islands in the Northwest Atlantic and in Alberta, Canada.

In any event, Murphy's going to keep drilling—everywhere from the Gulf of Mexico to the Congo to Kurdistan and Australia in the next two years. Before too long, the company, and its investors, should strike oil.

Cheap Oil

Murphy shares sell at a substantial discount to bigger rivals, like Anadarko Petroleum.